It is perfectly possibly to work with Drupal using the free tools that come with Windows, nothing more than notepad and Internet Explorer - but just because its possible doesn't mean its a good idea!
We work with Drupal all day everyday - and rely on a small arsenal of applications to stop us going insane!
1. Firefox - (http://www.mozilla.com/en-US/firefox/ )
Everybody has heard of firefox right? The browser that has MS running scared (and inspired the significant changes in IE7) is great for general browsing - but with a couple of add-ons it becomes the developers best friend.
2. Firebug (https://addons.mozilla.org/firefox/1843/)
3. HTML validator (https://addons.mozilla.org/firefox/249/ )
A very useful HTML validator that doesn't rely on any external validation sites - great if your developing on your localhost.
4. PSPad ( http://www.pspad.com/en/download.php)
Full on IDE's are great (see later), but sometimes they are overkill - you just want to edit that .htaccess file and not create a whole new web project. So a good old text-editor is your friend, and we happen to love PSPad - its quick, simple and has good syntax highlighting.
5. WAMP (http://www.wampserver.com/en/)
If your developing on your localhost you will need to run a web and database server. Setting up Apache and Mysql is time consuming, we would rather be developing than fiddling, so we use WAMP. You can get apache, PHP and mysql up and running in minutes.
6. Mysql GUI tools (http://dev.mysql.com/downloads/gui-tools/5.0.html)
Sure you can do all your mysql work from the command line, you don't really need a GUI - but why make things harder for yourself? The mysql GUI tools make working with databases easier, and easier is good.
7. Komodo (http://www.activestate.com/Products/Komodo_ide/)
Using an IDE is a personal choice, some people hate them, some people love them - but I know we couldn't live without PHP debugging. If you have spent any time working with Drupal you will probably have tried all sorts of debugging tricks (everything from print_r to deliberately breaking queries to dump them to screen).
Its not all plain sailing though, Komodo is not cheap (you can get a free trial) - and setting up the debugging is not always straightforward (nice tutorial here http://www.drupal.org.uk/node/64.
8. Drupal syntax files for Komodo
These little beauties will save you from spending all day on http://api.drupal.org! Follow the instructions and increase your productivity.
9. Xdebug firefox plugin (https://addons.mozilla.org/firefox/3960/)
Another simple plugin for firefox, this will start and stop the Xdebug PHP extension (used to enable debugging in Komodo) - not strictly needed, but should save you a bit of time.